Pandemic could cause deep, uneven recession, group predicts

Mar 22, 2007 (CIDRAP News) – An influenza pandemic as severe as the great flu of 1918 could cost the United States $683 billion and plunge the American economy into the second-deepest recession since World War II, a nonprofit health advocacy group warned today.

If rates of illness and death matched those of 1918—when one third of the population fell ill and 2.5% of those who were sickened died—US production of goods and services could shrink 5.5% in a year, according to an analysis released by the Trust for America's Health (TFAH).

But the pain would not be spread evenly across the country. States whose economies depend on tourism and entertainment would be hit hardest, with losses as large as 8% of their economic production, the group said. But areas that depend on other sectors—from agriculture and finance to real estate and government—might hold their losses to half that much.

"Businesses, governments, schools and other sectors could all face serious disruptions," said Jeff Levi, PhD, executive director of the TFAH, a nonpartisan group that has published several reports on pandemic preparedness.

While the analysis released today focuses on the impact of a pandemic on the US economy, the consequences would ripple worldwide, Levi said in a briefing for reporters: "In today's global economy, almost every aspect of commerce relies directly or indirectly on an interconnected, worldwide network of workers, products and services. A major shock to this network could have serious negative consequences on trade and commerce worldwide."

The TFAH report, "Pandemic Flu and Potential for U.S. Economic Recession," is the latest in a string of analyses that have attempted to forecast the potential economic impact of a pandemic as severe as the 1918 onslaught.

In December 2005, the Congressional Budget Office predicted that a 1918-like pandemic would cut US gross domestic product (GDP) by 5% in a year, while a milder pandemic similar to the worldwide flu of 1968 would shrink the GDP 1.5%.

A team from the Australian National University has set the impact of what they call an "ultra" pandemic at 5.5% of GDP in a year, while an analysis by BMO Nesbitt Burns Cooper, a brokerage firm, has forecast a loss of up to 6%.

Similar analyses have sought to assess the potential impact on other parts of the world and on the globe as a whole. In November 2005, the Asian Development Bank predicted a loss of 2.3% to 6.5% of GDP just in Asia.

In February 2006, the International Monetary Fund (IMF) warned that the "economic impact is likely to be significant," without assigning percentage estimates of potential losses, and added, "A severe pandemic could pose risks to the global financial system." And last winter, World Bank economists predicted a worst-case scenario of a 4.8% decline in global GDP and worldwide losses of up to $1.5 trillion.

"What we do know is that it is highly likely that during the peak of a pandemic, even if the mortality rate is low, you are going to have a lot of people not coming to work because they or family members are sick. This will lead to supply side disruptions," Charles Blitzer of the IMF told CIDRAP News today. "On the demand side, many people will not go out and expose themselves, leading to less demand for nonessentials," said Blitzer, assistant director in the IMF's Monetary and Capital Markets Department and coauthor of the Fund's pandemic-impact report.

"Quite a sharp drop in economic activity is likely during the peak of the pandemic, much bigger than the 5 to 6% annual average declines the studies have estimated," he added. "In all likelihood, once the pandemic wave passes, people will return to work and also catch up with some of their postponed purchases, leading to a spike up in economic activity."

The analysis released today relies on the economic models and assumptions made by the Congressional Budget Office, the Australian National University, and BMO Nesbitt Burns Cooper. It combines predictions of death rates and loss of productivity—due to workers' illness, family members' illness, and fear of getting sick—with estimates of the impact on 20 different business sectors.

Demand for arts, entertainment, and recreation is likely to drop by 80%, the report estimates, compared with 67% for transportation and warehousing and 10% for agriculture, mining, construction, manufacturing, finance, and education.

It is the first pandemic economic forecast to break down potential impact by state, Levi said.

The hardest-hit states are likely to be those whose economies rely on entertainment, tourism, and food service, the report says. Entertainment mecca Nevada would fare the worst, losing 8% of its GDP and $9 billion in a single year. Nevada would be closely followed by other high-tourism states: Hawaii (6.6% loss, $3.6 billion), Alaska (6.59% loss, $2.6 billion), Wyoming (6.4% loss, $1.7 billion), and Nebraska (6.22% loss, $4.4 billion).

The states at the lowest risk of major losses would be those with diverse economies, as well as those that depend on the services most likely to be in use during a pandemic, such as healthcare and government. Governments are busier during crises, Levi said, and use of healthcare is likely to rise during a pandemic, even though healthcare workers would be at higher risk of contracting the flu and missing work.

The TFAH recommends a menu of actions to mitigate a pandemic's potential economic impact, from improving state pandemic plans to encouraging continuity planning for business sectors as well as individual businesses. It will be particularly important to address the healthcare needs of the underinsured and uninsured who may forgo healthcare or come to work while ill, perhaps by creating a temporary entitlement such as a national "emergency health benefit," the group says.